General Question

How complex is the US tax code?

Seriously though, this question is coming from a person who has never paid taxes in his life (other than a 7% sales tax). I’ve never been employed, and I’ve never earned any taxable income, and I’ve never been involved in any sort of welfare program. It will probably be like this for a few more years, but eventually I’ll need to know more about taxes.

It’s complex, but it doesn’t get complex until you start having a complicated financial life. At first, you’ll use a short form. It will be easy. But when you have kids, a house, education loans, IRAs, a business, military service, and these activities take place in several states, then you will know what complexity means, and you may hire an accountant to help you.

On the other hand, tax software is pretty good, and can make it so you can do your taxes without an accountant.

Financial planning, however, is important. Do you have any earned income this year? Even baby sitting income?

Because you should start an IRA now with whatever money you earned. Money put into an IRA now will grow more significantly than any subsequent investment. You put 500 in an IRA now, and it could easily grow to more than 100 thousand dollars by the time you are 65. That’s a retirement fund without even trying.

Wundy’s financial advice for the day (courtesy of my wife, who wants to do this for our daughter).

It’s not very complex if you make a low to middle salary, don’t own any property, don’t make much investment income, and don’t pay out anything like alimony. I’m pretty sure there is still a 1040EZ form, which I assume is still just one page long and easy to fill out.

Once you get into higher incomes, more deducations, more write offs, more dependents, more investment gains and losses, then it gets more tricky. Add in if you own your own business, everything you can deduct for the business, it gets complicated.

To follow what Wunday said about IRA’s esoecially contribute when you have a low income, because it is before taxes. Once you make too much money, I think it is over $50k, it no longer is before taxes, only the earnings on it are. Roth IRA’s work differently, definitely brush up on the difference and what is best for you.

According to US News the tax code is 72,000 pages. And that is only the federal tax, you still have the state taxes. The idea that we could tell you everything about it, is absurd. Even the IRS doesn’t know everything about it, that why they have a disclaimer that if they give you a wrong answer to a question, you are still responsible. Not them. “In 2008 the IRS answered taxpayer questions incorrectly 10 percent of the time, according to the Government Accountability Office.”

The entire Tax Accountant Industry has grown out of the complexity of the tax code. No one understands it all and that is not accidental. You have your entire life to try and understand it and I guarantee, that won’t be enough. The best you can hope for is a working knowledge of your tax bracket. At this point it is much easier. The more you earn the more complex it gets.

The Internal Revenue Code really isn’t complicated at all; it’s very bare-bones. The IRC is the primary, codified tax law. Things get difficult because the IRC must be read in the context of volumes of regulations, revenue rulings, revenue procedures, IRS notices, IRS announcements, Treasury Decisions, and case law.

As some people have mentioned, much tax complexity relates to somewhat obscure, and more complicated, transactions. The more sophisticated or unusual the financial activity, the less simple the tax treatment.

But, average, middle-class and lower-middle-class taxpayers also face their fair share of confusion. This is because of America’s bizarre, prevailing attitudes about not raising taxes or providing services that are routine and expected in other wealthy, developed countries.

Example—In many countries, post-secondary education is free. In the U.S., free college or university is unheard of; a private school costs $55K per year, and state schools, although less costly, are still expensive. So, the U.S. has an impossibly elaborate system of tax credits and deductions for educational costs and student loan interest. Why make things easy—just extend free public education beyond high school—when they can be convoluted beyond belief?

Example—Most developed countries offer free preschool and daycare for young children. In the U.S., working parents are on their own. They scramble to find decent child care and then try to benefit from a maze of tax provisions. If they’re lucky, their employers will let them take $5,000 of salary, on a pre-tax basis, to apply to child care costs.

By the way, there’s no actual number of pages to the Internal Revenue Code. In a printed version, the heft depends on the publisher—the size of font used, and the amount of material placed on each page. Also, very few of us have any substantial tax authority, including the IRC, in print form. We use online, electronic versions—they can be searched instantly, and they don’t take up any space on a bookshelf.